EURUSD Skewed Negatively, AUD Weakens

US equities and USD in demand

The US markets made a good start to the week. The US equity indices pare gains amid Friday’s sell-off, while the USD is better bid against the majority of its G10 peers. In the absence of macroeconomic data, the better-than-estimated US earnings encourage a hawkish readjustment in Fed expectations. Following the aggressive dovish shift in the US sovereigns last week, the implied probabilities are currently pricing in the first Fed rate hike by December, compared to June/September two weeks ago. In this respect, there is a good margin for further rectification as it is perhaps too early to shift the first Fed hike expectation any further than September; the overall direction remains strongly positive for the US dollar. That being said, we remain in wait-and see mode and do not anticipate a significant USD rebound before the next FOMC meeting and the NFP release, due on April 29th and May 8th respectively.

In the equity market, Morgan Stanley (NYSE:MS), Credit Suisse (SIX:CSGN) and Halliburton (NYSE:HAL) announced better-than-expected EPS, while Costco (NASDAQ:COST) has reauthorized a share buyback programme of up to $4 billion and increased its quarterly dividend from $0.355 per share to $0.40. Among the upcoming earnings reports this week, we concentrate on DuPont (NYSE:DD) (Tue), Facebook (NASDAQ:FB), Coca-Cola, AT&T (NYSE:T), Boeing (NYSE:BA), McDonalds (Wed), Novartis, Google (NASDAQ:GOOGL), Microsoft (NASDAQ:MSFT), P&G, Amazon (NASDAQ:AMZN), Caterpillar (NYSE:CAT), Ericsson (Thu), Volvo, Biogen (NASDAQ:BIIB) (Fri).

EUR/USD revised from neutral to negative

As projected, the EUR-bulls are losing momentum as uncertainties on a potential Greek default broadly occupy the headlines. Moreover, the discussion is now brought up to the next level with fears dangerously extending to a possible “contagion effect”. Eurozone’s government-to-debt ratio extending a percentage point higher to 91.9% in 2014 did clearly not help to improve the EUR sentiment in Europe this morning. The lack of fresh EUR-long positions can only anchor the EUR/USD on the downside. As the waning liquidity on the short-end of the German sovereign curve pushes the 10-year yields below 0.80% (!), the core/periphery spreads widen to largest levels seen since mid-October 2015. The 40-week rolling correlation between EUR/USD and 10-year German/Spanish spread is about +40%, suggesting that the inflows into the Eurozone’s core sovereigns is still a considerable support for the EUR/USD, however we believe that at some point, the payoff on capital gains will be balanced by a weaker EUR and very low yields. Below this breakeven point, stands the mid-term target for parity.

In the short-run, we update our neutral view to bearish and remain seller on rallies below 1.0775 in anticipation of an extension inferior to 1.0642 (Fibonacci 23.6% on April 6-13 sell-off). The key short term support stands at 1.0458/70 (Mar low / technical support), stops are touted below.

Dovish RBA minutes revive market bets for a looser policy action

The RBA minutes highlighted concerns on weak investment both on mining and non-mining industries. “A small but increasing share of Australian iron ore production was estimated to be unprofitable at prevailing prices” mentioned the minutes, “while the decline in oil prices since the middle of 2014 was expected to lower the prices of Australian liquefied natural gas exports over the next few months”. In this context, the aim to shift Australia’s business from mining to non-mining sectors still lack important momentum as RBA officials predict a subdued pick-up in non-mining industry or “even decline over the next year or so”. The economic perspective is clearly favorable for lower RBA rates. The positive momentum in AUD/USD weakens as RBA minutes boost speculations for additional rate cut in May or June policy meetings. The 1Q inflation print is due tomorrow. A soft inflation read will give the RBA more flexibility for a looser policy action and accentuate the intermediate resistance pre-100 dma (0.7910).